How to Add an LLC Member to a Limited Liability Company

Adding a member to an LLC involves several steps and is important for any limited liability company business to do correctly. Mistakes can be disastrous. The process can vary and be very simple or extremely complex depending on each circumstance. However, here is the general 4-step process:

Step #1: Determine if the new person is eligible to be added as an owner

The good news is that the laws for this type of legal entity are very lenient when it comes to membership issues. There are no limitations or conditions as to the residence, citizenship, location, affiliation or any other characteristic of a member. Also, members do not have to be individuals. They can be corporations, partnerships, trusts, and even other limited liability companies.

However, the laws also allow an LLC company to impose its own set of restrictions, exclusions, and processes for admitting members. Because of this, it is very important that you first consult the company’s operating agreement and review, in detail, the provisions related to membership for conditions, limitations and other requirements. The first step is to make sure the specific person qualifies to be admitted in the first place.

If the LLC is taxable under the S corporation structure, it is also essential that admission of membership does not result in disqualification of your selection. Many of the selection requirements are directly related to the number and type of members of a company.

Step #2: Get member approval and go through all the formalities of the process

In most cases, the operating document will require existing members to obtain a certain percentage of votes. This is usually done at a meeting of owners or through the use of a standard government form document called a Written Consent.

You must strictly obtain all voting approvals and comply with any other required conditions and, most importantly, document such approvals and actions in written consent documents. File these documents with the other official business of the LLC.

Step #3: Have a Written Membership Issuance Agreement Documenting Membership Admission

This document does not have to be long and complicated if you have a simple transaction where a member is admitted in exchange for providing a cash contribution to the LLC. This document is usually called a Membership Issuance Agreement or a Member Subscription Agreement. For most small businesses, it’s a simple one-page document.

However, if there are other deal terms involved, then your issuance agreement must legally address them appropriately. A common example is if the new member’s property is subject to grandfathered rights or promises in the future. I strongly recommend that you retain an attorney to represent you or the LLC in these cases, as the potential consequences of improperly addressing additional issues can be significant. I have seen companies go under as a result of disputes between members that could have been easily avoided.

Step #4: Make Sure the New LLC Member Agrees to the Operating Agreement

The operating agreement is so vital. It not only addresses how the business will be operated, but also defines the rights and obligations of each owner.

When you admit a new member to an LLC, that person must sign a written document agreeing to be bound by the operating agreement and all of its provisions. Hopefully your operating document imposes this as a condition of completing a membership transaction (everyone should have this). Regardless, this should be a required step every time.